Invest-ability daily 13/10/21: Glass Half Empty

Why it’s better to drink in pubs than invest in them

Apologies for the lateness of today’s email – I have been in London with Phil meeting an impressively knowledgeable group of private investors from Signet. It was a fun afternoon, but I must admit to trepidation about returning to the big smoke after a long stint in Suffolk – I haven’t missed much about the place since moving up country 6 months ago, but if I had to choose anything I would have to say the pubs, and it was good to be back in one.

My arrival in Suffolk in fact coincided with the reopening of pubs on April 12 after the winter lockdown – a mixed blessing in some respects, because while the local pubs here are great, a cold spring meant it was not an easy time to be drinking outside. But it has been even more of a mixed blessing for the local landlords I’ve chatted to, who have had to deal with a lot more challenging things in reopening than a bracing easterly wind.

Constantly changing regulation, for one thing, has been a massive thorn in their side as they’ve adapted to life under Covid and battled to get punters back into their establishments – I know how much they’ve hated having to constantly nag customers to wear masks or sit down, hardly the version of ‘hospitality’ they signed up for. And the cost of keeping businesses up and operating al fresco has been vast – marquees don’t come cheap when everyone wants one, and the weather has not been especially kind.

But the biggest and most common problem has been difficulties attracting staff. I listened to one landlord turn away three potential bookings from a largely empty pub yesterday because she only had one chef working. She told me that she had advertised on eight separate occasions without a single applicant, because staff who had been on furlough simply aren’t coming back into the hospitality industry. And who could blame them, given so many pubs have been struggling to raise wages.

The official data backs up this anecdotal view – according to the ONS, vacancy rates in hospitality are the highest of any sector. In Suffolk, many pubs have reduced their opening hours or cut back on food service, even those catering to the rammed-out holiday town of Southwold. There are, unsurprisingly, rumours of trouble at the local brewery, Adnams, which dominates the area’s pubs.

Results from across the pub industry throughout the year have reflected this struggle, not least the grim figures from JD Wetherspoon a few weeks ago. It lost £194.5m before tax in the year to July, approaching double the previous year, and said that trading in August and September was still 8.7 per cent down on pre-pandemic levels.

But could there be light at the end of the tunnel? Marston’s today said that like-for-like sales in its final quarter to the end of September was, finally, ahead of pre-pandemic levels. What a difference a few weeks of sun makes, but as winter approaches we could be about to run out of that particular commodity, too – all eyes will be on Christmas trading and fingers crossed that we avoid another winter lockdown that shuts the doors again.

That’s especially important for Marston’s as there’s another thing it isn’t short of: debt. Its net borrowings now stand at a hefty £1.2bn, down from a peak of £1.6bn last October but still more than twice its market capitalisation – thankfully, its issuers have been kind partly, one assumes, because Marston’s does have a sensible roadmap to recovery.

Nevertheless, while heavy borrowing is a common feature of the capital-intensive pubs industry, investors in the sector will have noticed that deploying it appeared to be generating worsening returns since well before the pandemic. Even one of the sector’s better operators, Young’s, had seen returns on capital slip to the mid-single digits before the pandemic struck, according to SharePad data. And with a noxious cocktail of pressures now building even as restrictions ease which could see the industry’s slim margins shaved even further, I’d suggest it may still be better to drink in pubs than invest in them.

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